VSSL’s aim is to make it big in the special steel domain with backing of Aichi Steel Corp. Buy for target price of ₹260 (30% upside): ICICI-Direct

Wider opportunity at play with Aichi Steel Corporation as strategic partner, PLI beneficiary, portfolio play…

About the stock: Vardhman Special Steel (VSSL) established since 2010 and headquartered in Ludhiana (Punjab), is a leading value-added player domestically supplying special and alloy steel to automobile industry. It has an installed capacity of 2.4 lakh tonnes of billets per annum, 2 lakh tonnes of rolled bars and 0.5 lakh tonnes of bright bars.

• VSSL in the recent past i.e., 2019 has entered into a strategic alliance with Aichi Steel Corporation (ASC) Japan, part of Toyota group, wherein ASC had purchased 11.4% stake in the company through preferential allotment and as same time entered into a Technical Assistance Agreement thereby helping VSSL upgrade its systems and processes in order to be a globally competitive quality supplier of special steel.

• VSSL possesses one of the unique features of producing special steel though EAF route of steel making thereby having controlled carbon emissions; green steel at play.

Investment Thesis

• Aichi Steel association- a structurally long term positive: Aichi Steel is a global conglomerate belonging to Toyota group wherein steel produced by ASC is the source of high-quality products that support the automotive industry. VSSL has long being trying to rope in Aichi Steel for a strategic alliance with deal finally cracked in 2019. ASC with it engineering & technology prowess as well as high quality standards in manufacturing special steel is expected to transform VSSL into a truly world class organisation supplying quality/value added components for the automobile industry. It will open a broader export play with VSSL planning to up the game in this domain supplying special steel to ASC approved plants/vendors in South East Asian markets with intent to grow export sales to 20-25% of sales volume by FY25E vs. 5% in FY23.

• Brownfield expansion under execution, much larger vision for 2030: With sales volume of ~2 lakh tonne in FY23, the company is witnessing capacity constrains amidst steady state growth in the domestic automobile space. It is however expanding brownfield from 2 lakh tonne to ~2.5 lakh tonne of rolled products capacity in phases and is expected to be completed by FY26E at a total capex spend of ~₹300 crore which also includes land acquisition for new plant. Organically we have built in 4.8% sales volume CAGR over FY23-26E, consequent Sales/PAT growth is seen at 6.2%/8.6% CAGR over FY23-26E. The company however envisaged a much large role with ultimate aim to emerge as the #1 special steel manufacturer in India by 2030.

Rating and Target Price

• We assign BUY rating to the stock gaining confidence from VSSL’s aim to make it big in the special steel domain amidst backing of Aichi Steel Corporation. We value VSSL at ₹260 i.e., 18x PE on FY25E-26E average EPS of ₹14.3/share

• We drive comfort from controlled leveraged B/S at VSSL (Debt: Equity 0.2x as of FY23), Capital efficient business model (RoE at ~12-15%) and positive CFO generation